Fixed Income Factors to Keep an Eye On | Lord Abbett
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Fixed-Income Insights

Lord Abbett Partner and Portfolio Manager Jeffrey Lapin J.D. discusses why his team is focused on Federal Reserve tapering, economic performance, quarterly earnings, and supply chain challenges.

Transcript

Hi this is Jeffrey Lapin. I'm a partner at Lord Abbett and I manage the bank loans and credit opportunity strategies here at the firm.

Title: Four fixed-income factors to keep an eye on

Right now, the loan team is focused on three aspects of the macro environment that I think most of my colleagues share. And then one specific to the loan market.

So the three that that are of concern to everybody in fixed income are: what is the fed is going to do, how is the economy going to perform, and then how are earnings going to be.

So on the Fed side, we expect that the Federal Market Open Committee will announce a schedule for tapering bond purchases sometime before the end of the year. The rates curve is already biased higher with a strong economy and pretty strong policy support. And we think that what this will indicate is that the economy is doing well enough that the Fed could start to remove accommodation. This will be positive for risk assets like loans.

On the economy, there is some concern about inflation, obviously, and then also whether we're going to dip into a lower growth period and maybe experienced some stagflation. We think that the better argument is for a reflationary boom, with growth picking up as the economy transitions away from Covid and the Fed begins to remove accommodation. But we will be watching things like the employment report, the inflation report, to see if that view holds water.

And then on earnings were coming up into an earnings period for Q4 and we expect Q4 in a couple of months. We want to see that companies are continuing to benefit from the economic uplift even, as some of their pricing inputs go up. Do they have pricing power? Can they sustain margins? Can they continue to grow and do well? And this will also provide an uplift for credit.

And then finally on the loan side specifically, we're looking at supply and demand in the in the space. So overall we've seen tremendous demand and loans this year through CLO formation, retail flows, and then overall people recognizing the relative value. This has been met with near record supply, but overall demand is overwhelmed supply creating a tailwind for the asset class. We want to make sure that that continues, or at the very least that supply is no worse than neutral as that will continue to provide an uplift for rates and prices.

Disclosure

Unless otherwise noted, all discussions are based on U.S. markets and U.S. monetary and fiscal policies.

Asset allocation or diversification does not guarantee a profit or protect against loss in declining markets.

No investing strategy can overcome all market volatility or guarantee future results.

The value of investments and any income from them is not guaranteed and may fall as well as rise, and an investor may not get back the amount originally invested. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon, and risk tolerance.

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Fixed Income Investing Risks

The value of investments in fixed-income securities will change as interest rates fluctuate and in response to market movements. Generally, when interest rates rise, the prices of debt securities fall, and when interest rates fall, prices generally rise. High-yield securities, sometimes called junk bonds, carry increased risks of price volatility, illiquidity, and the possibility of default in the timely payment of interest and principal. Bonds may also be subject to other types of risk, such as call, credit, liquidity, and general market risks. Longer-term debt securities are usually more sensitive to interest-rate changes; the longer the maturity of a security, the greater the effect a change in interest rates is likely to have on its price.

The credit quality of fixed income securities in a portfolio are assigned by a nationally recognized statistical rating organization (NRSRO), such as Standard & Poor’s, Moody’s, or Fitch, as an indication of an issuer’s creditworthiness. Ratings range from ‘AAA’ (highest) to ‘D’ (lowest). Bonds rated ‘BBB’ or above are considered investment grade. Credit ratings ‘BB’ and below are lower-rated securities (junk bonds). High-yielding, non-investment-grade bonds (junk bonds) involve higher risks than investment-grade bonds. Adverse conditions may affect the issuer’s ability to pay interest and principal on these securities.

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